Buyers stepped back into equity markets both here and abroad Wednesday amid several catalysts that included upbeat economic data from Europe, dovish chatter from some Fed officials, notable stock upgrades and rising inventory and retail sales figures out of the U.S. economy.
The combination of the factors listed above pushed the Dow up by 0.7%, the S&P higher by 1.1% and the Nasdaq up by 1.7%.
Bond yields ticked higher on the spate of upbeat news, with the 10-Year trading at 2.87%. The dollar index (DXY) was flat at 80.64, WTI crude was up $0.65 to $92.45/bbl, nat gas was higher by $0.09 to $4.37/MMBtu and gold was down $6.40 to $1,244.70/oz. In general, commodity prices remain on the soft side, which in turn keeps inputs costs down for manufacturers and results in higher profit margins. This should be translated into strong earnings for most of the U.S. industrial companies when they post fourth-quarter results.
Speaking of earnings, the market’s rally is not being driven by the muted reaction to earnings from JPMorgan (JPM) and Wells Fargo (WFC), both of which traded flat in Wednesday’s session. Healthcare and technology were solidly higher as fund managers see earnings leverage in biotech- and Internet-related companies. One of the biggest stock upgrades on Intel (INTC) prior to its earnings release today also provided a boost to tech stocks.
Wednesday had the look and feel of a key reversal day following what was hopefully a washout that had the S&P successfully test its 20-day moving average at 1,825 before closing at 1,839. We need to see some confirmation above 1,850 to determine that this isn’t just an oversold bounce before the “all clear” sign can be posted for the bulls, but it appears that we’ve seen a turn for the better.
Given this trading environment, I’ve got a short-term covered call in a top chip maker, Micron Technology (MU) that offers both upside opportunity and some downside protection.
Shares traded higher after the company reported stronger than expected results on Jan. 7. Micron’s first-quarter profits came in significantly above analysts’ consensus estimate. The financial performance of Elpida, a Japanese memory maker that Micron acquired last year, performed above expectations last quarter. In addition, favorable flash-memory market trends boosted results, and the company provided a very bullish outlook. My short-term price target for the stock is $26, and I recommend a covered call to play it.
Recommendation: For every 100 shares of MU that you own or purchase at market, use a limit order to sell to open one MU Feb. $25 call at current levels near 55 cents or more per contract, good till canceled.
In addition to strong earnings, the company received one of the day’s stock upgrades from JMP Securities, which cited “favorable demand memory pricing dynamics, stabilizing PC trends, and opportunities in the ramp of Internet of Things.” JMP set a price target at $31.
With this covered call, we’re not aiming to ride the 100% of MU’s ride up, but we are going for the easiest part of the move, the low-hanging fruit. When we factor in the option premium we get for selling the covered call and a stock entry around current levels of $23.55, the trade offers us a chance at a quick 8.5% return by February options expiration. My expectation is that MU moves above the $25 level by Feb. 21, and the shares will be called away at $25 strike price.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and 4x greater income.
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